Is your PAYE code correct?

Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. This has not been helped by errors made by the tax authorities.

PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings. This is done by the issue of one, or sometimes a series of tax codes, which are used by your employer to calculate the tax to be deducted from your earnings.

HMRC now seeks to issue in-year coding notice changes in order to minimise any underpayment arising at the end of the tax year.

Many employees have incorrect tax codes. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as changing jobs and / or losing the benefit of a company car, or they may have started investing in a pension.

When the tax code is incorrect, it is normally the responsibility of the employee to resolve this with HMRC. Where benefits in kind are now being taxed through the payroll (known as payrolling benefits) the tax code should not include the benefit, although it may be reduced to collect tax owing from previous years.

It is important that we check your PAYE code now, because it is much easier to rectify mistakes before the tax year ends. As a first step, though, look at your salary slip and see what code is currently being applied. The letter at the end of the code tells us whether your code includes one of the standard allowances, and you can see if this is right for your circumstances:

C (prefix) your income is taxed at Welsh rates of income tax. For 2019/20 these rates do not differ from English rates, but this will very likely change over the next few years

K (prefix)you have income that is not being taxed any other way and this is worth more than your tax-free allowance

L includes standard tax-free personal allowance for those born after 5 April 1948

M marriage allowance - you have received a transfer of 10% of your partner's personal allowance

S (prefix) your income or pension is taxed at the Scottish rates of income tax

T your tax code includes other calculations to work out your personal allowance, for example it has been reduced because your estimated annual income is more than £100,000

OT your personal allowance has been used up, or you’ve started a new job and don’t have a form, P45, or you did not give your new employer the details they need to give you a tax code

BR all your income from this employment or pension is taxed at the basic rate (this rate often applies if you have more than one job or pension

D0 all your income from this employment or pension is taxed at the additional rate

NT you are not paying tax on this income

W1 or M1 at the end W1 (is week 1) and M1 is (month 1). This means that your tax is based on what you are paid in the current pay period, not the whole year.

Where you have the letter K at the beginning of your code, this is a special tax code and means that you are paying tax on more than just your salary through PAYE. It may be that the tax due on your state pension might be collected through increasing the tax you would otherwise pay on your company pension, or you may be receiving some rental income which is being taxed through your salary rather then you paying tax at the end of the year. If you owe back tax, this can also be collected by an adjustment to your tax code. A K code applies when the adjustments made reduce your allowances to less than zero - in effect, it means that you have a 'negative' tax allowance. The maximum tax which can be deducted using a K code is 40% of your income in each month.

Where someone has an S prefix to their code, this means that they are to be taxed at the Scottish rates of income tax. This will be the case where the individual's main home is in Scotland. HMRC is responsible for making these decisions, so if anyone is in doubt about whether they should be classed as a Scottish taxpayer, they will need to deal with HMRC (rather than Revenue Scotland) to resolve the issue. Similar rules apply to Welsh taxpayers from April 2019.

New NIC category letters

If you employ someone aged over 16 but under 21, or an apprentice aged under 25, you'll have to choose 1 of the new National Insurance categories when assessing their secondary National Insurance contributions. It's the employer's responsibility to ensure the correct category letter has been applied based on the age and circumstances of the employee. The categories are:

Cheap or interest-free loans

Where loans from an employer total more than £10,000 at any time in the year, tax is chargeable on the difference between any interest actually paid and interest calculated at the 'official' rate (currently 3%).

Your remuneration package

An attractive remuneration package can include any of the following:

Salary

Reimbursement of expenses

More generous expenses - business travel in first or business class, or a better quality hotel on business trips

Bonus or profit related award schemes

Share incentive arrangements

Pension provision

Childcare

Life assurance and/or healthcare

Choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car

One mobile phone

Contributions to the additional costs of working at home

Other benefits-in-kind including, for example, cost, including VAT, travel and accommodation of all parties in a tax year costing not more than £150 (including VAT) per head for the year, or long-service awards

Additional holiday entitlement

Of course, negotiating the appropriate package is a matter for you and your employer, but you should seek our advice to ensure that your overall package is as tax and NI efficient as possible.

Expense payments

Your employer must check that any expenses he reimburses to you are deductible for tax purposes. If this is the case, then the expenses are exempt from tax and there is nothing reported to HMRC. If expenses are paid which are in excess of the tax relief that would be available for them, your employer will either tax these amounts through the payroll or may report them on form P11D, which will result in a tax demand.

Travel and subsistence

The rules which allow tax relief for travelling and subsistence expenses are quite complex, and subtle differences in your working arrangements can change the amounts which you are able to claim, or can be paid tax free. You will not normally be able to claim for the cost of travelling to your normal place of work, but if you have more than one place of work, sometimes travelling expenses are tax deductible when travelling to a temporary place of work for up to 24 months.

Site-based employees are able to claim a deduction for travel to and from the site at which they are working, plus subsistence costs when they stay at or near the site subject to meeting certain conditions.

Because the tax impact on your travelling expenses can be quite significant, you should ask for help if you are considering a change involving a long commute to work.

If an employee works from home for at least part of the time, he or she may be paid an expense allowance of up to £4 a week (£18 a month) by the employer without having to produce evidence of expenses.

If travelling on work, personal incidental expenses may be paid tax-free up to £5 a day in the UK or £10 a day overseas. This is designed to cover personal expenses incurred while away from home, such as newspapers and laundry, that may not otherwise be allowable.

Employees must not charge the expenses in their hotel bills in addition to the fixed-rate allowance.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs provided they do not exceed the annual allowance. The employee's contribution attracts tax relief but not relief from national insurance.

You should be aware that while your employer can contribute to your personal pension scheme, these contributions are added to your own for the purpose of measuring your year's pension input against the annual allowance which is £40,000.

Extra relief may be available dependent on your level of contributions during the last three tax years. Please ask us or your current pension adviser for advice.

Performance-related pay

Although there are no tax breaks, performance related pay and bonus schemes are incentives to many to work harder and enjoy some of the benefits of the employer's increase in profits. There can, on the other hand, be a national insurance saving for employees (not directors) if performance-related pay is not included in the weekly or monthly pay, but instead paid as a one-off bonus.

The system for taxing those who use company cars has seen annual incremental increases in the cost of benefits, while maintaining the basic approach to taxing those who use a company owned vehicle. The basis of the charge is to tax a figure calculated by multiplying the car's list price by an emission-based percentage, with a 4% surcharge on diesel-powered cars.

Cars emitting CO2 at a specified level are taxed on rates varying from 16% to 37% of the list price. Emissions for non-diesel driven cars from 0 to 50g/km (this band includes electric cars) are taxed at 16%, from 51-75g/km are taxed at 19% and from 76-94g/km, at 22% of list price.

Drivers must add 4% to their appropriate percentage if the car is propelled solely by diesel (up to a maximum of 37%). Cars that meet the Real Driving Emissions Step 2 (RDE2) standard are exempt from the diesel supplement.

Cars with higher levels of CO2 emission are taxed on a graduated scale rising to a maximum (for both petrol and diesel) of 37% of the car's price. These figures apply to all company cars, including second cars.

CO2 emission information

For all cars first registered from November 2000, the definitive CO2 emissions figure for tax purposes will be recorded on the Vehicle Registration Document (V5).

Older cars

Cars first registered before January 1998, for which there are no reliable CO2 emissions data, are taxed according to their engine size, as follows:

Engine size (cc)

Percentage of car's price charged to tax

0 - 1400

20%

1401 - 2000

31%

2001 and more

37%

Fuel scale charges

Where the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO2 - based car benefit percentage applied to a standard value of £24,100.

Employee contributions

Where the employee is required, as a condition of the car being made available, to pay for the private use of a car, the value of the benefit is reduced accordingly (on a pound for pound basis). Capital contributions of up to £5,000 made by employees towards the cost of the car and/or accessories, when the car is first made available, will reduce its list price for tax purposes.

By contrast it is ‘all or nothing' for the fuel scale charge, which remains at the full value unless the employee pays for all private fuel!

HMRC has published advisory fuel only rates which will be accepted either for employers reimbursing employees for the cost of fuel for business mileage, or for employees reimbursing employers for the cost of fuel for private mileage in a company car.

Alternative rates may be negotiated, for example when it is necessary for the performance of his or her duties that an employee uses a four-wheel drive vehicle. In this instance a higher rate per mile might be agreed due to the typically higher fuel consumption. The reimbursement rate for electric only cars is 4p per mile.

Current mileage rates

1 September 2019

These mileage rates officially apply as of 1 September 2019

Advisory fuel only mileage rates

Rates per mile

Engine size

Petrol

LPG

1400cc or smaller

12p

8p

1401cc to 2000cc

14p

10p

Over 2000cc

21p

14p

Engine size

Diesel

1600cc or smaller

10p

1601cc to 2000cc

11p

Over 2000cc

14p

1 June 2019

These mileage rates officially apply as of 1 June 2019

Advisory fuel only mileage rates

Rates per mile

Engine size

Petrol

LPG

1400cc or smaller

12p

8p

1401cc to 2000cc

15p

9p

Over 2000cc

22p

14p

Engine size

Diesel

1600cc or smaller

10p

1601cc to 2000cc

12p

Over 2000cc

14p

1 March 2019

These mileage rates officially apply as of 1 March 2019

Advisory fuel only mileage rates

Rates per mile

Engine size

Petrol

LPG

1400cc or smaller

11p

7p

1401cc to 2000cc

14p

8p

Over 2000cc

21p

13p

Engine size

Diesel

1600cc or smaller

10p

1601cc to 2000cc

11p

Over 2000cc

13p

1 December 2018

These mileage rates officially apply as of 1 December 2018

Advisory fuel only mileage rates

Rates per mile

Engine size

Petrol

LPG

1400cc or smaller

12p

8p

1401cc to 2000cc

15p

10p

Over 2000cc

22p

15p

Engine size

Diesel

1600cc or smaller

10p

1601cc to 2000cc

12p

Over 2000cc

14p

1 September 2018

These mileage rates officially apply as of 1 September 2018

Advisory fuel only mileage rates

Rates per mile

Engine size

Petrol

LPG

1400cc or smaller

12p

7p

1401cc to 2000cc

15p

9p

Over 2000cc

22p

13p

Engine size

Diesel

1600cc or smaller

10p

1601cc to 2000cc

12p

Over 2000cc

13p

For employees using their own transport

The approved maximum tax and national insurance free mileage allowances for employees using their own transport for business are as follows:

Flat rate

First 10,000 Miles

Miles over 10,000

Car or van

45p

25p

Motorcycle

24p

24p

Bicycle

20p

20p

Tax payable

These standard charges are subject to income tax at the basic, higher or additional-rate, depending on the employee's rate of pay. The tax is usually collected under the PAYE system by appropriate adjustment of the employee's tax code.

For the benefit to be attractive, the employee must pay less in extra tax than it would cost them to run their own car out of their taxed income. These are examples of the 2018/19 tax costs to an employee of a company car:

Tax-free benefits

Car Parking

The provision of a car parking space at or near the employee's place of work is not an assessable benefit.

Pool Cars

There is no tax for using a pool car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others.

Please note: A pool car must not normally be kept overnight at or near an employee's home.

Business use of an employee's own car

It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own cars.

A statutory system of tax and national insurance free mileage rates applies for business journeys in employees' own vehicles, as follows:

Cars and vans

On the first 10,000 miles in the tax year

45p per mile

On each additional mile above this

25p per mile

Motorcycles

24p per mile

Bicycles

20p per mile

It is no longer possible to make a claim for tax relief based on actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.

Note that the lower rate for more than 10,000 business miles only applies to income tax. The national insurance rate remains at 45p for any number of miles.

Unless the employee is reimbursed at a rate higher than the statutory mileage rate, the payments do not need to be reported on a P11D.

Passenger payments

When an employee travelling on business carries fellow employees as passengers he may be reimbursed a further 5p per passenger tax free provided the journey is a business journey in respect of the passengers. No claim can be made if the employer does not make passenger payments.

Company vans

The taxable benefit for the unrestricted use of company vans is £3,430 (with no reduction for older vans) plus a further £655 of taxable benefit if fuel is provided by the employer for private travel. Electric vans are currently taxed at 20% of the van scale rate, eg £2,058.

The tax payable on the use of a company van ranges from £411.60 up to £1,838.25 p.a., and the employer's Class1A NIC payable ranges from £284 to £563 p.a.